Question

A firm has EBIT of $1,000,000 and depreciation expense of $400,000. Fixed charges total $600,000. Interest expense totals $70,000. What is the firm's fixed-charge coverage ratio?

-2.33 times
-2.45 times
-1.67 times
-1.00 times

Answer 1

To determine the firm's fixed-charge coverage ratio, you add EBIT and depreciation, then divide by fixed charges plus interest expense. The calculation results in a ratio of approximately 2.09 times, which does not match any of the provided answer choices, suggesting an error in the question or options.

Step-by-step explanation:

The firm's fixed-charge coverage ratio is calculated by adding earnings before interest and taxes (EBIT) and depreciation expenses, and then dividing by the sum of fixed charges and interest expense. In this case:

EBIT + Depreciation = $1,000,000 + $400,000 = $1,400,000.

Fixed charges + Interest expense = $600,000 + $70,000 = $670,000.

So, the fixed-charge coverage ratio is $1,400,000 / $670,000, which equals approximately 2.09 times.

However, none of the options provided (-2.33, -2.45, -1.67, -1.00 times) match this calculation. Thus, it seems like there might be an error in the question or the provided options.